Significant changes to the Takeover Code came into effect last September, following an extensive review of the UK takeover regime in the wake of the controversial takeover of Cadbury by Kraft. Given the importance of those changes, the Panel said that it would undertake a review of their effect after a year or so (depending on the level of bid activity).

This week, 12 months after the changes came into effect, we hosted a client seminar to look at the impact of the changes in practice and consider which issues the Panel should be focusing on as part of its promised review.

The topics covered included:

  • the new put up or shut up regime and the demise of virtual bids;
  • the impact of the prohibition on offer-related arrangements; and
  •  disclosure and whether the changes have improved the level and quality of information available.

In this briefing we summarise the key points that were discussed at our seminar.

The put up or shut up regime and virtual bids

A reminder of the changes

  • An announcement by a Target which commences an offer period (including where the announcement is required following a leak) must name all potential Bidders that have approached the Target.
  • There is then a 28 day deadline by which a named potential Bidder must announce either its firm intention to make an offer or its intention not to make an offer (and be held to that for 6 months subject to certain limited exceptions), that is "put up or shut up".
  • Only the Target may apply to the Panel for an extension of that 28 day deadline.

The impact of the changes in practice

  • Confidentiality and secrecy are even more important than before given that any leak will lead to a PUSU deadline and possible withdrawal of the Bidder.
  • Well advised Bidders are doing more preparation before approaching a Target and Targets are looking to be more prepared in anticipation of any approach.
  • Only the Target, and not the Bidder, can seek an extension to a put up or shut up deadline and so the Target has greater control than under the old regime. However, Target boards need to strike the right balance between warding off unwanted Bidders and denying Target shareholders an opportunity to consider a reasonable offer. Most Targets have therefore been willing to seek PUSU extensions.

The PUSU regime: some statistics

In 12 out of 19 extensions granted, the first extension was for 28 days.

Subsequent extensions tend to be sought/awarded in multiples of 7 days.

  • The new regime makes it very hard for a Bidder who needs regulatory approvals which cannot be achieved in the Code timetable to launch a hostile offer. The only route realistically available is to announce a pre-conditional firm intention to make an offer. However, this will require the Bidder to have the funds needed to implement the bid available over a protracted period and so the Bidder is likely to incur significant funding costs (unless the Panel is willing to permit re-financing pre-conditions).
  • The formal sale process regime (which provides exemptions from the requirements to name possible Bidders, the prohibition on inducement fees and, in exceptional circumstances, the prohibition on other offer-related arrangements) has generally been used to date by companies facing insolvency but it was used successfully by Cove Energy to create a competitive bid situation. A key question we are often asked is when a Target can announce a formal sale process. This will depend on the circumstances but it cannot be used to avoid naming a Bidder when its approach has leaked.

Issues for the Panel's review

  • Possible Bidders, in particular overseas Bidders, are very concerned about being named. The trigger for naming – that is first active consideration of an offer – is problematic in practice because the Panel appears to apply such a low threshold and certain Bidders might avoid appointing advisers simply to avoid the active consideration regime. In our view this is something the Panel should revisit.
  • The difficulties for a Bidder which needs regulatory approval in launching a hostile bid is, we think, an unintended consequence of the new regime and needs to be looked at.
  • We also think that the Panel should review its policy of policing the status of negotiations before granting a PUSU extension. In our view it should be for the Target to decide whether it is willing for the deadline to be extended and continue the "siege".

The ban on offer-related arrangements

A reminder of the changes

  • The Code prohibits any agreement or arrangement entered into between the Target or its concert parties and the Bidder or its concert parties, in connection with an offer (Rule 21.2).
  • Commitments by a Bidder for the benefit of a Target are permitted provided it is not a reverse takeover under the Code.
  • There are a number of limited exceptions for undertakings in relation to confidentiality and non-solicitation of employees/suppliers/customers, co-operation to obtain regulatory clearances, dealing with share schemes and irrevocable commitments to accept an offer or vote for a scheme.
  • In addition, a break-fee is permitted from a Target if it is for the benefit of a white knight following a hostile takeover announcement or following the announcement of a formal sale process.

The impact of the changes in practice

  • Confidentiality agreements are still used on the vast majority of recommended offers. The Bidder still frequently agrees to a standstill as part of the confidentiality agreements, even though the Target is no longer allowed to agree a mutual standstill.
  • Co-operation or Bid-conduct Agreements have replaced Implementation Agreements. These contain the commitments that are permitted by the Target and also commitments by the Bidder to the Target. They have only been used in a minority of offers to date, but we expect their use to increase and consider them to be important defensive tools for Targets.
  • Although the Target is unable to offer any reciprocity, some Targets are still managing to obtain important commitments from the Bidder in Co-operation Agreements such as:
    • using its reasonable endeavours to complete the bid;
    • providing information to the Target for the bid documentation;
    • not invoking the acceptance condition/keeping the offer open for set periods; and
    • a requirement to obtain the Target's consent to switch between a scheme and an offer.

It is important to note that a Bidder does have the ability to walk-away under the Code – in particular it can invoke the acceptance condition at the first closing date or other specified closing dates. Commitments by the Bidder in a Co-operation Agreement can therefore be an important protection for the Target.

  • Break fees are now banned, unless an exception applies. In terms of reverse break fees (i.e. from Bidder to Target), there have only been two so far (Glencore/Xstrata and Harvard/Chengdu) in contrast to the number of reverse breaks agreed when the Target was able to reciprocate with a mutual break fee arrangement. Equally, the exceptions for white knights and formal sale processes have not been used in practice so far, with the Cove/Shell break fee on a formal sale process being the only example to date.
  • The carve-out from the prohibition for irrevocables only applies to the undertaking to accept the offer or vote for the scheme, not any other undertakings included in the same document. A key point to remember is that the offerrelated arrangement restriction applies to Target concert parties as well – and that includes the Target's directors and shareholders owning 20% or more of the Target. There have been apparent breaches of the prohibition over the last year – in particular irrevocables from directors which have included other commitments such as undertakings to recommend the offer and requirements to notify the Bidder of any offers by third parties.
  • Irrevocables have assumed an even greater importance for deal protection. There is evidence that UK institutional shareholders are more willing to provide irrevocables with matching or topping rights, with hurdle rates of 10% becoming typical.

Click here to view graph.

  • The loss of control through an Implementation Agreement has not deterred the use of schemes of arrangement. The ability to include mini-long stop dates (by which the shareholder meetings must be held and court approval obtained) as conditions for a scheme is a key new protection for the Bidder. These are the equivalent of the key offer dates. In particular, the deadline for the shareholder meeting is the equivalent of the deadline for satisfying the acceptance condition.
  • In practice, a significant number of matters have had to be referred to the Panel to get consent for them as offerrelated arrangements. Some of these are innocuous and are simply required in order to get the deal done. These have included, for example, confirmations about Target information in the documentation for which the Bidder will be responsible because a prospectus is being produced, joint proxy solicitation agreements on a scheme, and financing arrangements between the Bidder and Target in rescue situations. The Panel has also rejected some minor commitments such as warranties about the enforceability of a Co-operation Agreement and Target commitments to provide the Bidder with information for the bid documentation.
  • The ban on offer-related arrangements has proved particularly problematic in mergers of equals where issues such as shared costs become important. The restriction has meant the Panel has effectively created a new work stream, looking in detail at all of these sorts of bid arrangements.
  • The Panel has become aware that there have been a number of breaches of the blanket ban on offer-related arrangements and is starting to clamp down.

Issues for the Panel's review

  • The range of agreements and arrangements that are now banned creates practical problems and is creating extra work for the Panel and for parties to bids and their advisers. Many of these arrangements are about getting the deal done for the benefit of the Target, rather than just deal protection for the Bidder. The Panel should consider whether its blanket restriction is working in practice and whether there should be a further list of permitted arrangements set out in a new Practice Statement.
  • It is not clear why there should be a restriction at all on commitments by Target shareholders with a holding of 20% or more – if they wish to provide a break fee or other commitments to the Bidder why should they not do so? It is not the Panel's role to protect shareholders from themselves.

The disclosure regime: an increase in transparency or an increase in bureaucracy?

A reminder of the changes

  • Parties will be held to any statements of intention they make for a period of 12 months (unless they specify a shorter period).
  • Coupled with this is enhanced disclosure of the Bidder's intentions as regards the Target's employees and business.
  • Greater disclosure is also required about the offer financing and other financial information by the Bidder. Advisers' fees must also be disclosed.
  • Employee representatives also have enhanced rights to receive information and to make their views known.

The impact of the changes in practice

  • Despite the enhanced requirements for a Bidder to disclose its intentions regarding the Target and its employees, including the requirement for a negative statement if there are no such plans, in practice most of the disclosures by Bidders remain relatively bland and uninformative.
  • It is important to ensure that even statements made in press interviews and analysts' meetings for example are carefully scripted and controlled, as the Panel may treat any comments as a statement of intention that must be adhered to for 12 months.
  • We have seen a greater number of employee opinions (though, given the level of disclosure on employee issues being made by Bidders, in some cases they say have been unable to form a view on the bid).
  • Far greater disclosure is now required around financing arrangements and financing documents must also be put on display, with only limited scope for redaction.
  • The Panel has granted several dispensations to allow "market flex" clauses to be disclosed at the time of the offer document rather than the Rule 2.7 stage (a market flex clause enables an arranger to change the pricing of a loan if changes in the market mean that the arranger needs to adjust the price in order to be able to syndicate the loan).
  • The disclosure of advisers' fees does not appear to have had any adverse impact on the market, and is probably only of interest to other advisers. Where fees are estimated and there is a material change in the actual fees, the Panel has not to date exercised its power to require public disclosure of that fact.
  • Whilst the new rules make it clear that the Code does not require that the Target board's recommendation should solely come down to the price being offered, in reality it often still does. However, Target directors must not forget the duties they have under the Companies Act. The instances where a Target is not able to make a recommendation are fairly rare and boards should generally be able to, and be expected to, make a firm recommendation one way or the other.

Issues for the Panel's review

  • The requirement to disclose market flex arrangements should be considered, including whether it should be required at all. If it does continue to be required, we suggest that lenders need a longer dispensation from the disclosure requirement as they may well not have syndicated the loan by the time the offer document is published.